By: John P. Napolitano, CFP®, CPA, PFS, MST

The purpose of a family office is to organize and centralize the management of a family’s personal and business financial affairs, and to maintain the financial house in as good an order as that of a well-run public company.

The origin of the family office concept came from extremely wealthy families, with net worth in today’s dollars in excess of $100 million. The family office was often a separate entity, with employees ranging from a CEO or CFO, a chief investment officer along with a staff of bookkeepers and personal assistants that could do everything from monthly financial statements through booking travel and personal care appointments.

In a traditional family office, no service or calling is beyond the scope of the office’s services. Employees may be called upon to pick up the car from the auto dealership or bail a troubled family member out of a precarious position.

Many of these wealthy families have made their money from success in business. The family office staff is separate from the business financial staff, and will not be involved in the operations or even the accounting for the business. They will, however, be extremely familiar with the business as it relates to the family. The family office will stay on top of business matters as they directly relate to family wealth, with issues such as loan guarantees, timely reporting to shareholders and the family office, dealing with tax planning or other benefit planning as it relates to family members, obtaining current valuations of the company and ensuring that the value of the business is enhanced by smart family and succession planning. The family office may also assist with acquisitions and sales of various business entities via the lens of the family estate plan and investment objectives and best use of talent and resources.

Frequently it is the family lawyer or accountant that sits in the chair of the executive of the family office. Clearly it is a role for an educated, well versed financial executive, and not a sales person. This person should be knowledgeable in many areas, including accounting and recordkeeping systems, law, finance, markets, taxes and risk management. In addition to their own personal experience and knowledge, this person should be able to build a team of subject matter experts in any area to support the family’s needs. For example, some family offices own property, businesses or investment accounts overseas.  The traditional family office may or may not actually manage the financial assets. It’s worth noting that asset oversight is different than asset management. Oversight typically involves the coordination and working with investment advisors and money managers, and not actually selecting the individual investments. The family office may perform diligence on investment managers and consultants, but not overseeing the actual day to day management of the assets. Those that do get involved with day to day asset management are typically those whose fortunes were built by skillfully managing investments and also those that are so large that they built or acquired their own investment management staff.

The common tasks that a family office may oversee include:

  • Comprehensive oversight of family assets
  • Contemporaneous recordkeeping of all financial assets
  • Daily management of property and other real asset holdings
  • Prepare financial reports showing cash flow, income, gains, losses and statement of assets and liabilities
  • Coordinate the advice and services received from all of the clients other professionals
  • Be responsible for implementation and ongoing management for each matter under oversight
  • Personal concierge services to the family members for personal or business matters
  • Family and entity governance and carrying out the wishes of the family matriarch or patriarch
  • Oversight of philanthropic activities, foundations or gift trust accounts established

 

Each family has its own set of unique issues, and each family wants to delegate some or all of these matters. But in this traditional family office, where the entity is owned and controlled by the family, there are typically no conflicts of interests or other profit making activities. The entities sole purpose is service to the family.

The type of family offices that could be provided by a CPA firm is known as the multifamily office (MFO). The MFO is basically a professional services firm that delivers family office services for more than one family. The origin of the multi-family office comes from traditional family offices where the family decided to use their team to help others for a fee. But beyond a traditional family office that decides to serve others, many for profit enterprises have flourished in the multi-family office model, including progressive law and CPA firms.

The multi-family office frequently serves families less wealthy than the traditional family office, but essentially performs many of the same critical functions with respect to the financial side of the family life. For the CPA firm with clients whose net worth exceeds $25-50 million or so, this model offers lots of potential for the right CPA firm. The firm is probably deeply involved in many family financial matters and often has a strong personal relationship with the founding or senior members of the family who may have created the wealth.

Of course, the accounting firms that serve these types of clients are frequently larger firms with old school partners who want nothing to do with matters beyond accounting and tax. This is another matter that really falls into the category of practice management. But fortunately, as aging partners retire the younger generation sees the benefit of delivering elevated levels of service to the firm’s better clients.

A multi-family office is intended to be a for-profit entity. And as such, before you as an individual or CPA firm decide to offer these services, you must to well document your services, compensation methods and the required licenses.

Many CPA firms are still tied to the hours and rates economy, and will track their time and simply send bills each month based on the time spent. While this can work, it’s not the most common method of compensation. More common than hourly would be flat fees for a list of covered services.

Some firms will also add fees for assets under management or overseeing and helping to select the actual asset manager. If your firm intends to offer asset management also, consider segregating your fees for AUM versus traditional family office services. If the asset management division becomes significant, perhaps a separate entity may also make sense. Be careful with the asset management part.  You do not want to deflect the important role of the basic family office to where the conversations are more about investments. 

Whether your family office fees are based on hours or flat fee billing, the issue of licensing will still apply. CPAs can avoid registration as an investment advisor if their investment advice or financial planning advice is merely incidental to the practice of public accounting, and not really advisory in nature. Naturally, this is a very subjective standard and many CPAs that I talk to do not register. For many firms, however, they could be dancing on the edge of a highly regulated industry and should seek professional counsel as to whether registration as an investment advisor would make sense.

Don’t let the name “registered investment advisor” (RIA) fool you. The registered investment advisor license and registration is the same license that covers all financial planners. You may be deemed by regulators to be practicing investment advice and financial planning to the extent that you get involved in matters such as shaping goals and objectives and providing advice that is more than incidental to the practice of accounting for the family wealth. Registration as an investment advisor will also subject you to the same rules about compensation, marketing and audit as other financial services firms registered as RIAs, requiring a compliance professional or consultant.

Some multi-family offices do oversee or actually manage assets for their family office clients. Offering these services is easier if you’re already a larger investment advisory firm with experienced asset managers on staff. This isn’t the typical profile of the typical CPA financial planning shop, and these are not the types of clients where you should be cutting your teeth in the investment advisory business. A model that makes sense here is to use your intelligence to oversee other managers and critically evaluate their offerings in terms of the criteria that you are looking to fill.

Whether your CPA firm has a vibrant wealth management division or not is irrelevant when it comes to offering family office services. The family office role for a CPA firm is just like outsourced CFO work, except for a family rather than an entity. As that outsourced CFO, you will rely on other outside subject matter experts, and coordinate their efforts so that nothing falls through the cracks.

Should you choose to work with another firm that calls themselves a multi-family office, be careful. In my experience, I’ve seen many financial advisors who want to move up market simply call themselves a family office without the experience, desire or services to warrant that title.

 

John P. Napolitano CFP®, CPA is CEO of US Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.

1-05012764 (June 2020)